number of contracts for custom spreads

Discussion in 'Trading' started by etemtezcan, May 5, 2011.

  1. Hello
    Say I have spotted two correlated commodity/index futures and found one of them is holding better against the other. Let's say I have spotted silver and natural gas are correlated and natty is firmer.
    So I would like to construct a custom spread long natural gas/short silver.
    How shall I choose number of contracts in each leg of spread so that I can eliminate directional bias as much as possible.
  2. 1) You should still view that "spread" as being separate outrights. That's how it'll probably be margined on your statement. :(
    2) You could consider using "volatility balance" between the contracts by taking into account their respective historical volatilities. Without going into too much detail, you'd probably have many contracts of NG per contract of SI. :)
    3) The real danger with any "randomly correlated" spread is that you get scorched/buttraped on both sides. :eek: